Owning blue-chip shares that pay dividends is one way to generate a second income without having to work for it.
That is what I am planning to do next year. By following the plan below, I reckon I could realistically aim to generate more than £2,400 of passive income streams next year – and hopefully each year beyond.
Step one: choosing an investment vehicle
My first move is to decide what vehicle I will use to invest.
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That can involve picking the Stocks and Shares ISA or share-dealing account that best suits my own circumstances and needs (everyone is different).
Although the standard annual ISA allowance is £20k, I can use that allowance until the first week of April and then another year’s allowance kicks in. So that could give me a £40k allowance in the next calendar year, alongside any existing funds I have invested. Also, I am not limited to investing through an ISA – even if I max out my allowance, I could buy shares in a dealing account, though without the potential ISA tax advantages.
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I will target a 7% average yield. This means I will need to invest £35k to aim for my £2,400+ second income target.
Step two: choosing the shares
That £35k is ample to spread over multiple shares.
Diversifying in that way means that if one share turns out to disappoint me – for example, by cancelling its dividend – then all my eggs are not in one basket. No dividend is ever guaranteed to last, though plenty do.
The sort of income share I like to own (and in fact do own) is FTSE 100 financial services provider Legal & General (LSE: LGEN).
As it unveiled at an investor event this week, its cash generation potential is so strong it is weighing the possibility of increasing its share buybacks. That comes on top of a progressive dividend policy that has seen the dividend per share increase every year since the financial crisis, bar one (when it was held flat).
With its juicy yield of 8.6%, I see it as potentially being a strong contributor to my second income. Legal & General has a proven business model, large customer base, strong brand, and a focus on the retirement market that is large and likely to stay that way.
One risk I see is a sudden stock market correction leading to a loss, as investments are revalued and policyholders potentially cash out. As a long-term investor, though, Legal & General is the sort of passive income machine I am happy to hold.
Step three: earning without working
Will I keep holding?
Companies can suddenly, or gradually, evolve in ways that affect the investment case for better or worse.
So, although I am an investor rather than a trader, that does not mean I ignore my portfolio for years at a time. Instead, I will pay attention to see if anything happens that makes me decide to sell some shares or buy others.
Meanwhile, I will hopefully earn my second income of over £2,400 annually – starting next year!
